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Weekly Preliminary OS Climate Risk Review (3/4/21)

By March 11, 2021 March 26th, 2021 No Comments

The word “flood” doesn’t appear even once in East Baton Rouge Sewerage Commission’s (EBROSCO) 134 page preliminary official statement. In contrast, searching (“east baton rouge” + “flood”) in Google News yields 6,730 (!) search results.

This week’s climate risk non-disclosure distinction goes to:

East Baton Rouge Sewerage Commission, Multi-Modal Revenue Refunding Bonds (Series 2021A)

risQ Score 3.0, Flood risQ Score 4.5

East Baton Rouge is the most populous Parish in Louisiana, home to the state capital Baton Rouge and located approximately 90 miles upstream from New Orleans on the Mississippi River. In 1986, when all publicly owned sewerage systems in the parish were consolidated into a single public utility, East Baton Rouge Sewerage Commission (EBROSCO) was formed to maintain and operate that System. This debt offering — estimated at $137,920,000 — is payable from net revenues consisting of fees and charges levied and collected from the customers of the System, as well as a pledge of .5% sales and use tax levied within the Parish of East Baton Rouge. The bonds dated 2022-2028 are not subject to redemption prior to maturity; the bonds maturing in 2041 are subject to mandatory tender and purchase on February 1, 2028.

Less than 5 years ago, in August 2016, prolonged severe rainfall resulted in catastrophic flooding across southwestern Louisiana — East Baton Rouge took more than a smack in the jaw. Aon Benfield estimated that the historic flooding event cost the U.S. economy between $10-$15 billion, with insured losses totaling under $5 billion1 (Alexa, what does “unsustainable flood insurance gap mean?”). Over 100,000 homes were damaged, with less than 20 percent covered by flood insurance (interestingly: per capita annual NFIP claims in East Baton Rouge Parish on average between the years 2000-2019 were in the 99th percentile nationally [~$98,000 per capita]. This leads us to believe that while the Parish leans heavily on the NFIP for flood risk transfer, the majority of Louisiana properties damaged by the 2016 flooding event were outside of the NFIP flood zone and weren’t required to purchase flood insurance). East Baton Rouge was the hardest hit Parish, with approximately 41,000 housing units damaged (out of ~190,000 total housing units as of 2015), and total losses totaling approximately $1.0 billion. In addition to physical losses, Louisiana Economic Development estimated that East Baton Rouge lost $213 million in labor productivity + a staggering $540.2 million in ‘lost value added’ (in other words, GDP within the Parish was severely impaired).2

 

Major catastrophic physical damage, economic and insured losses, and GDP impairment following the 2016 Flood — and, property values weren’t spared either. According to a Parish-level tax assessment data analysis conducted by The Advocate in January 2017, values for East Baton Rouge properties that did not flood remained generally the same between 2015 and 2016, however those that did flood saw significant losses during the same period (e.g. the Target store in Baton Rouge was inundated with 29 inches of water, its assessed property value falling from $10.5 to $7.3 million).3

(Again, the word “flood” doesn’t appear even once in EBROSCO’s 134 page preliminary official statement?)

One key ‘justification’ for EBROSCO’s blatant non-disclosure, despite the economic devastation caused by the 2016 flooding, is that East Baton Rouge Parish’s total taxable value was in fact higher for 2016 than it was in 2015, “due to growth from new construction, new properties going onto tax rolls and property values increasing because 2016 was a reassessment year helped make up for the flood losses,” according to Parish Assessor Brian Wilson. Fitch even announced just less than 2 months after the event that it did “not anticipate any material impairment to … East Baton Rouge Parish Consolidated Government operations and overall financial profile as a result of the unprecedented August 2016 flooding.”4 Fitch’s ‘stable’ ratings outlook was supported by the fact that just that month, the federal government announced that the reimbursement rate for flood-related damages in the Parish would increase from 75% to 90%.

The Parish and EBROSCO might not get as lucky the next time around, especially if the size of its tax-/customer-base continues to decline (the Parish’s market-adjusted population change between 2012-2018 was -4.65%, and the its population has declined each year since 2016 according to the US Census Bureau). risQ projects that by 2030, EBROSCO’s cumulative GDP impairment will be 56% (92nd percentile nationally) and property value-at-risk will be 18% (88th percentile nationally). These VaR metrics are primarily driven by inland flood — EBROSCO ranks in the 95th percentile for inland flood-driven GDP impairment, and in the 93rd percentile for property VaR, nationally.

EBROSCO’s outlook could worsen as flooding events increase in severity and frequency under climate change, and if population outflows continue. In recent years, calls for the Parish and EBROSCO to implement resilient water and wastewater infrastructure improvements have approached a fever pitch. In 2019, The Advocate reported that “water systems experts and civil engineers say the ideal solutions to the flash flooding that’s becoming more frequent in East Baton Rouge Parish during torrential rains are expensive and would take years to implement. Residents within Baton Rouge have made claims of ‘mismanagement with the municipal drainage system’, which has led to ‘hundreds of thousands of dollars in property damage on one street alone’.5

Death by a thousand cuts? Credit impairment by a few dozen flash flooding events? Nuisance flooding is just as powerful of a driver for population and economic loss than a catastrophic flood event like the one that hit Louisiana in 2016.

Did we mention that the word “flood” doesn’t appear even once in EBROSCO’s 134 page preliminary official statement? That’s just weird.

Honorable Mention

Galveston Independent School District, TX (risQ Score 4.6; Highest Peril Score 4.4 (Flood and Hurricane))

This one was actually in this week’s Negotiated Sales, but still a chance to look at the POS that was posted just outside of our weekly review window last week. First of all, this school district is 99th percentile for both Property VaR and GDP Risk nationally, so climate risk and climate risk mitigation better get some meaningful dialogue. “Flood” is mentioned three times in the main body of the POS under the heading “Weather Events and Hurricane Harvey”. Some pretty obvious copy/paste language is used, not the least of which is that the impacts of Harvey are actually not mentioned at all so no-one actually checked that the heading pasted in and the paragraph pasted in actually reconciled. In reality, Harvey was far more catastrophic for Houston and its immediate surrounds. However, close inspection of the financials on page 6 of Appendix A shows $10.3 million in 2018 expenses incurred by Galveston ISD as a result of Harvey with no mention of reimbursement (for those who mistakenly that think FEMA is a never-ending trough of make-whole). Later in the document, buried on page 44 of Appendix B, there is a much more robust view of what a hurricane can do the district. Hurricane Ike (2008) caused $48 million of damage to the school district’s facilities of which $8.4 million was covered by insurance and an adjusted $24.6 million was covered by FEMA (with 10% of that still outstanding). This leaves a gap of $15 million that the district had to cover, along with the cost of money in the intervening period before they got imbursed for the rest. That sums up to a significant line item. Going back a long way, Galveston remains the sight of the deadliest natural disaster in US history in 1900. Much more recently, the impacts of serial, smaller flooding events have grown as well. From May 2019 to May 2020, Galveston experienced 18 days of high tide flooding, matching a record set in 2017. No mention of any of this in the OS, or the potential for all of this getting worse over time with sea level rise and climate change. Also no mention of any local efforts to mitigate risk anywhere in the POS. Is no-one asking about this so that the issuer doesn’t feel compelled to proactively discuss it?!?!?! For the record, Galveston County is 100th percentile for NFIP claims/capita/year since 2000 at an astounding $205,724. It is 98th percentile for NFIP property buyouts (which has retired 126 properties from the ad valorem tax base in recent years), but still has a vast amount of flood risk uninsured. There is evidence of some sort of mitigation occurring from other sources, including the City of Galveston having a rating of 6 in the NFIP Community Rating Survey. Still that rating is not nearly sufficient to catch up – and keep pace with – the climate risk Galveston is staring down in the coming years.

Parish of Ascension, LA (risQ Score 3.8; Highest Peril Score 4.9 (Flood))

Page 13 has a brief section on “Hurricanes, Flooding and Sea Level Rise” which is curious as Ascension’s vulnerability to the latter is minimal, to say the least. This reeks of copy/paste again, but you could certainly argue the disclosure reaches a minimum viable level, even though it tells you nothing of the past, and nothing of the mitigation required to protect the future. In terms of the past, Ascension suffered from massive flood damage in 2016 that inundated thousands of homes. The only mention of such an event is a table buried all the way down on page C-67 in the Appendix. There you will find a list of all the events for which some sort of FEMA reimbursement was garnered but you’ll struggle to find the costs that weren’t. For the subsequent four years, little new development of property had occurred and local residents continued to fight any further build outs that were exacerbating the risk to existing properties. That doesn’t speak to quality growth of the ad valorem tax base when FEMA property buy-outs were also occurring for the very worst of the serially flooding properties. Not surprisingly, the parish is 99th percentile nationally for NFIP flood claims/capita/year and sits right at the lowest 10% of counties in terms of property value growth.

In terms of any risk mitigation or resilience – none of which is mentioned in the OS mind you – there has been a 2 year delay on finalizing a drainage plan that arose from the 2016 flood, and this is still not resolved. The parish is in the NFIP Community Rating Survey, but is only an 8 which is not indicative of meaningful action and the status has not changed since 2008. This doesn’t help with reducing insurance costs for locals to any great degree, which is a problem when around 70% of the flood risk is uninsured.

College of Charleston, SC (risQ Score 3.9; Highest Peril Score 4.6 (Flood))

First and foremost, the POS has no discussion of flood or hurricane risk, although “hurricane” shows up twice in Chris Tobin’s bio on page 26 in the context of prior roles related to Hurricane Katrina. So, what is the risk to the college?

Worth highlighting as Charleston, SC has a risQ Score of 4.1, but the College has to be treated differently geospatially. As it turns out the campus and the college-operated accommodations and housing are (with the exception of some athletic facilities) in a compact area between Wentworth (south), Warren (north), Pitt (west) and Meeting (east) streets, essentially the yellow and orange areas in the view below. As you can see from the VaR map key, risk escalates significantly once you go further out than this and start to include coastal areas. That greater area will likely bring in off-campus student housing as well as housing owned by the faculty, and then impact overall economy, services and livability of the town in general. The question is how much impairment of the town in the event of a moderate/major disaster and/or all the cost of mitigating the risk will flow through to the college itself.

One thing worth noting here, and that the college would have been wise to note as well, is that the City of Charleston has a 6 rating in the NFIP Community Rating Survey, while the Charleston County has an outstand 3 rating (as the scale is 1 to 10 with 1 being the best). Only four counties nationally rate higher, and they’re all on the west coast. What this means is that a 35% discount on flood insurance is available to all residents, which will shore up financial resilience to future flooding events if nothing else. It also means the county is leading robust steps towards flood mitigation.

1Louisiana flooding will cost U.S. economy more than $10 billion (The Advocate)

2The Economic Impact of the August 2016 Floods on the State of Louisiana (Louisiana Economic Development)

3Data on tax assessments, flood losses for every East Baton Rouge property (The Advocate)

4Flood Damage to East Baton Rouge Parish, LA Facilities, Operations Appears Manageable (Fitch Ratings)

5As flash flooding becomes more frequent, East Baton Rouge officials struggle to find affordable solutions (The Advocate)

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